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Goldman Sachs Group Inc and JPMorgan Chase & Co both reported an
uptick in a commodities trading risk measure, with Goldman's now
the highest in a decade, according to a Reuters review of bank
filings.
Oil, gas, wheat and precious metals markets have grown more
volatile since Russia invaded Ukraine and Western countries
imposed sanctions on Russian trade. But results so far suggest
that banks are managing the risk effectively.
The London Metal Exchange (LME) halted nickel trading last month
after prices doubled to more than $100,000 per tonne. Sources
blamed the price surge on short covering by one of the world's
top producers.
Wall Street were once big commodities traders, but they scaled
back after the 2007-09 financial crisis as tighter regulations
restricted their ability to trade with their own money and led
to rising costs and shrinking profits.
But banks' commodities trading exposures have been gradually
rising over the past two years while the Federal Reserve pumped
liquidity into capital markets.
The Fed's actions pushed asset values higher and triggered
massive investor purchases, rupturing the normal workings of the
market and creating a bonanza for investment banks dealing in
gold, silver and other precious metals.
Goldman Sachs Group Inc's average daily Value at Risk (VaR) in
commodities totaled $49 million in the first quarter of 2022, up
from $32 million in the previous quarter, and its highest for
over a decade, the bank said on Thursday.
That was above the $33 million average VaR which the bank had in
equities trading and the $25 million in currency trading.
A bank's VaR shows how much money it could lose trading a
particular asset in a single day. For commodities, that covers
physical assets like gold and nickel and investment and hedging
tools like derivatives which allow investors to profit from
commodities without owning them.
JPMorgan Chase & Co's average daily trading VaR in commodities
rose to $15 million during the first quarter, up from $12
million the previous quarter and surpassing $12 million for
equities and $4 million for foreign exchange.
"Price increases across commodities resulted in higher
counterparty credit and market risk," Chief Financial Officer
Jeremy Barnum told analysts on a conference call.
While commodities trading exposures are rising, results so far
show banks are making money. Goldman reported a 21% increase in
fixed income, currencies and commodities (FICC) trading
revenues. JPMorgan's fixed income trading revenues fell 1% from
an exceptionally strong performance a year ago.
Citigroup does not report VaR alongside its earnings. Its most
recent disclosures showed the bank's VaR in commodities was up
year-on-year for each quarter in 2021, peaking at $48 million at
the end of the second quarter.
Morgan Stanley, which has cut the size of its commodities
trading business since the financial crisis, does not break out
its VaR by asset class.
(Editing by David Gregorio)
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